What is it?

A bond or guarantee provides security to protect a beneficiary against the default or insolvency of the Principal up to the limit of the bond.

A bond may be issued to protect the beneficiary against the failure of a principal to complete a contract in accordance with its terms and specifications. It may also be issued to protect a government department against failure of an enterprise to pay taxes or customs duties.

Bonds play a vital part in domestic and international trade and in particular protect taxpayers against the loss of public funds.

Whilst bonds and guarantees used to be issued mainly by banks, the security of an insurance company is now equally acceptable in the majority of countries.

This has enabled many enterprises to set up separate lines of credit for bonds and guarantees with insurance companies. In doing so, they free their lines of credit with banks for working capital purposes that might otherwise be locked at a time when such working capital is most needed.

What are the advantages of COFACE?

Tending advantage
A beneficiary has a greater degree of confidence knowing that their contractor has been pre-qualified by a bond given by a world-class insurer (COFACE is rated AA by Fitch Ratings and Aa3 by Moody’s). This may increase your prospects of winning a contract.

Financial benefits
A bond issued by COFACE does not impact your working capital available from your bank(s). Typically, when a bank issues a bond, the amount is deducted from any borrowing facility they have arranged. A COFACE bond is a separate facility.

What are the different types of bonds?

Advance payment bond
It can be possible to negotiate advance payments under an awarded contact, generally to enable initial purchase of the essential raw materials required to perform the work. An advance payment bond will secure return of the monies advanced should there be default under the contract and the contractor has not actually earned them. As these bonds enable payment of cash to be made in advance of work being carried out they provide significant cash flow benefits to the contractor.

Bid or tender bonds
Such bonds are often required to accompany formal contract tenders. A bid bond provides the employer with the twofold guarantee that the contractor will honour its tender and provide a performance or contract guarantee bond should the bid be the successful one. A bid bond provided by a reputable surety can represent an important sales advantage at the tender stage.

Performance bond
It has become almost standard practice for many corporate and Government bodies to stipulate that a performance bond sealed by a reputable surety is provided as security against default under any contract they award. Performance bonds will typically have a face value of 5-15% of the contract price. If the client fails to perform and the bond is called, the surety may be asked to arrange for the completion of the work in accordance with the contract or pay the bond value depending on the wording of the bond.

Customs bonds
A customs bond is a guarantee from an insurance company to the Singapore Customs that the importer will faithfully pay all taxes and duties forthe importation of merchandise into the territory.

Retention monies bonds
Under a contract it is common to find a provision for the retention of a percentage of money owed for work undertaken in case the work subsequently fails to remedy any defects, repair and proper maintenance of the project. The retention monies is usually held until all such defects, repair and maintenance are fully completed to the satisfaction of the employer. The whole of the maintenance period is usually 12 months from the contractual date of completion 12 months. Release of retention monies can be achieved by providing a bond as security and, like advance payment bonds, provides cash flow benefits.

What does COFACE’s underwriter require?

An underwriter will need to assess not only the overall financial strength of the applicant but also its technical and commercial ability, previous experience and current workload. He will also look at the managerial strength, controls and systems and probably require a face-to-face meeting.

Bond facilities

If you require more than one bond to be issued during the year a facility may be the best option. A facility is designed to establish a close and long standing relationship between a client and COFACE. Work can be tendered or negotiated in the knowledge that a bond facility is available to meet bonding requirements as they arise.